House prices continued to rise in January

UK house prices increased by 0.7% in January and were 8.8% higher than January 2013 according to the latest Nationwide House Price Index.

House prices are around 4% below their 2007 peak.

Commenting on the figures, Robert Gardner, Nationwide’s Chief Economist, said:

“The housing market is continuing to gather momentum on the back of further solid gains in employment, record low mortgage rates and rising confidence. House prices recorded their thirteenth successive monthly increase in January, rising by 0.7% on the month. The price of a typical home was 8.8% higher than January 2013.

“There have been encouraging signs that activity levels in the housing market are also gradually returning towards more normal levels. According to HMRC, the total number of housing transactions increased to 103,000 in December, 30% higher than the same month in 2012. The pickup in activity appears to be fairly broad-based, and it is encouraging that first time buyers are a key driving factor behind the upturn.

“First time buyers are the lifeblood of the housing market. As well as accounting for a significant proportion of housing transactions (historically around 40% of transactions involving a mortgage), they also play an important role in the wider market, for example in helping to complete chains, enabling those that already own a property to move.

“For this reason, it is particularly encouraging that first time buyer numbers have been rising strongly in recent quarters. Indeed, at 73,700 in Q3 2013, they were up 32% compared with the same period in 2012 and accounted for around 44% of activity – close to an all-time high as a share of lending activity.

“At present, the typical first time buyer home costs 4.6 times average earnings. While this is above the 20 year average of 3.6 times earnings, it is well below the highs of 5.4 recorded in 2007.

“Moreover, thanks to the decline in interest rates, lower house prices (currently 4% below their 2007 peak) and a modest increase in nominal earnings, the typical mortgage now accounts for around 19% of borrowers’ average monthly earnings, below the 24% recorded before the financial crisis and slightly below the long term average.

“There is less scope for buyers to reduce monthly payments by opting for an interest only mortgage, as these products are less readily available (interest only accounted for 2% of new lending to first time buyers in November, down from a peak of 37% in September 2007).

“However, there is a trend towards borrowers lengthening the term of their mortgage, with 52% of mortgages currently over 25 years, up from 40% in 2007. This may, in part be to lower their monthly repayments, though the shift may also reflect that people are both living and working for longer.

“The typical first time buyer is still putting down a 20% deposit, but the greater availability of mortgages for borrowers with a smaller deposit is also likely to be supporting demand.

“However, the most decisive factor in achieving a sustained increase in first time buyer numbers is likely to be the performance of the wider economy – especially the labour market with 280,000 new jobs created in the three months to November – the largest increase on record.

“The significant improvement in the labour market in recent months also raises the prospect of higher interest rates ahead. After all, the unemployment rate, at 7.1% in the three months to November, is rapidly approaching the 7% threshold the MPC stated would prompt it to consider the case for raising interest rates.

“Moreover, more than a million first time buyers have entered the market since the Bank Rate was cut to a 300 year low in early 2009, many of whom have yet to experience a hike in interest rates. While we do not expect interest rates to rise until mid-2015, borrowers should be prepared for the prospect of interest rates increasing back towards more normal levels.”